Casella keeps up rapid M&A pace, eyes Rochester, New York as key market
CEO John Casella said the timing was quicker than expected, but opportunities to drive more volume to the company's landfills were just too good to pass up.
|Adjusted Net Income||$13.4M|
Casella Waste Systems has been especially active this year with Northeast tuck-ins and it's starting to pay off. During the company's quarterly earnings call, executives said 4% of their revenue growth came from acquisitions. They expected to grow free cash flow for the year by 15-20%, which puts Casella well ahead of pace to achieve its 2021 goal of 10-15%.
CEO John Casella said those deals are expected to contribute about $6 million in EBITDA this year and $8-10 million next year. Because integrating all of the new equipment, volumes and contracts from the variety of small businesses now under Casella's banner will take time, their full value isn't expected to be realized until 2020.
"I think it's important to note where it's going to take a little while. We had a great pipeline coming into this year of acquisitions and things have happened a bit faster than we had originally planned," said Casella.
Feeding the Landfills
- Casella's latest acquisitions, announced alongside earnings, are Boon & Sons in New York and Oceanside Rubbish in Maine. Following four other recent deals in the upstate New York market, including multiple in the Rochester area, this brings annual acquired revenue up to $70 million — far above the company's $20-40 million target.
- Casella described the Rochester moves as emblematic of the company's current M&A strategy of buying companies that can drive more tonnage to existing landfills. Both of the new deals fit that description.
- COO Ed Johnson said this means targeting companies with their own transfer stations or proximity to existing Casella landfills. "It will improve our cash flow and make us more profitable by filling unused capacity in our landfill network," he said, "And in the long run, it will make us more recession-resistant by giving us more control of our landfill volume."
Behind all of this acquisition activity is a set of ongoing regional disposal trends that will make it especially profitable. Casella reported an overall increase in pricing of 4.8%, driven by both the collection and landfill segments. While volumes were slightly down, and are expected to be lower at landfills in Q4 to meet permit requirements, Casella said this will actually work in their favor "because it sets a nice pricing tone" heading into 2019.
With disposal capacity becoming scarce in the Northeast, Casella is ready to cash in and push out lower value tonnage as needed to get the best returns. Within the overall price increase, average price per ton at landfills was up by 8%. Executives see room to keep going even higher.
"Although 8% average price improvement at the landfill is strong, we believe the supply and demand balance supports an aggressive approach," said Johnson, citing growing export rates from Massachusetts as a particular example.
Given Casella's recent focus on expanding its business in New York, where the company estimated earlier this year it was sitting on 2.2 million tons of unused capacity, more acquisition activity could be possible for the region. John Casella said he sees another $400 million worth of acquisition opportunities in the regional footprint, including tuck-ins and new markets, and hinted the company is "actively working on acquiring several more businesses."
- All of this activity is also helping offset headwinds for Casella's recycling business, which was down $10.7 million in adjusted EBITDA YoY. Recycling revenues were down $5.5 million YoY due to lower commodity pricing and volumes, though partially offset by higher tip fees.
- Variable processing costs were up $1.2 million due to the multiple factors that come with meeting tighter standards. CFO Ned Coletta said Casella is "very focused" on contamination and finding ways to impose new fees as a way to drive revenue from customers that may still have contracts with less favorable terms for the company.
- For contracts that do have a sustainability/recycling adjustment (SRA) fee, the numbers are starting to come around in Casella's favor. As for "legacy contracts" that don't, Casella said he was willing to walk away if needed, but sounded confident about the company's negotiating position for renewals. "The location of our recycling facilities for those larger contracts is a critical component in terms of the overall ability to provide that service," he said. "It’s our view that it’s more likely that those contracts would be renewed at a profitable rate.
- Like Casella's organics business, its customer solutions segment is now also performing better than recycling, with $17.2 million in revenue for the quarter. Revenues were up $1.6 million YoY due in part to new multi-site retail and industrial customers. Casella described this as "an important growth area through our 2021 plan."
- Labor is also an ongoing focus — as it is for everyone in the industry — due to a tight employment market. In addition to raising wages and benefits on a regional basis, Casella said the company has launched a new "career path program" for drivers and maintenance technicians to help improve retention. The program will expand to workers at MRFs and landfills next.
- Based on a variety of factors, including the bevy of acquisitions, Casella has raised its full-year guidance to $642-652 million for revenue, $135-139 million for adjusted EBITDA, and $44-47 million for normalized free cash flow.
- Casella Waste Systems Third Quarter 2018 Results
- Seeking Alpha Earnings Call Transcript
- Waste Dive Organics now generating more revenue than recycling for Casella
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